NEW YORK (The Deal) -- New York activist hedge fund investor Casablanca Capital LP is going full tilt against Cleveland iron ore and coal miner Cliffs Natural Resources (CLF - Get Report) by nominating six directors to its board, according to a Friday regulatory filing. The investor has blamed the company's failed expansion strategy for precipitating an 80% decline in the company's value.
In a letter to Cliffs' board made public after the market closed Thursday, Casablanca, which has a 5.2% stake, called for a new strategy focused on its core U.S. business, which it said could be spun off into a master limited partnership or sold. The fund also reiterated its support for 30-year metals and mining veteran Lourenco Goncalves to lead Cliffs as CEO.
Donald Drapkin, chairman of Casablanca and former chief associate of financier Ronald Perelman, said its slate of directors, including Goncalves, are "far better equipped" than current board members to implement a new strategic direction for Cliffs and to take the steps that are "urgently required" for the company to get back on track and realize its full potential value.
The fund's nominees include: Goncalves, who was CEO of Metals USA in 2003, took the company private in 2005 with Apollo Global Management LLC and then public again in 2010 before selling it to Reliance Steel & Aluminum Co. last year for $1.2 million, a 5.5 times return for investors; Rip Fisher, the former Goldman Sachs head of mining and Canadian corporate finance and investment banking; Patrice Merrin, a director of Stillwater Mining Co. and former chairman of CML Healthcare Inc. and ex-CEO of Luscar; Joseph Rutkowski, former executive vice president of business development at Nucor Corp.; Gabriel Stoliar, former CFO at Vale SA; and Douglas Taylor, CEO and co-CIO of Casablanca.
Casablanca said it made the move to nominate directors because Cliffs has responded to its proposals with "defensive half-measures, a hastily-announced CEO appointment [president and COO Gary Halvorson] and analytically flawed attacks."
The fund again criticized Cliffs' acquisition of the Bloom Lake iron ore project in Eastern Canada in 2011 as part of its purchase of Consolidated Thompson for $4.9 billion, noting that its expansion WAS suspended after spending $6.5 billion and losing $14 million last year. It also claimed only a single director has purchased shares for cash with the rest receiving grants from the company, adding that the board and executives own less than $10 million at current market prices and Goncalves holds more shares than executive chairman James Kirsch.
Cliffs said Friday that it will review the list of nominees but thinks Casablanca's proposal fails to provide a "sustainable, long-term value-enhancing alternative" and is confident that its plan will improve long-term financial and operating performance. It also said it will postpone the record date for its annual meeting, as Casablanca requested, to a date to be announced later and offered to appoint two new Casablanca-approved independent directors to its board and a third who would be agreed upon by both parties.
Cliffs' annual meeting date, which had been set for May 13, has also been postponed to a date to be named later.
Among Casablanca's other claims: that Cliffs attempted to strip shareholders of rights to change the company's bylaws; that its severance agreements include change in control payments to employees that are triggered if the current directors cease to be a majority on the board; that the company is hoarding cash expected to amount to $600 million by the end of this year; that the company shows no return of capital for shareholders beyond the current dividend, which was cut 76% last year to improve cash flow for investment in the Bloom Lake expansion; and that Cliffs needs to cut its costs and sell its Asia Pacific assets.
Casbalanca said Cliffs has already received interests in its Asia Pacific assets and a sale could finance remaining obligations at Bloom Lake, debt reduction and return of capital to shareholders.
On Jan. 28 Casablanca made public a letter to Cliffs' board recommending that it spin off the company's international assets, double its annual dividend, convert its U.S. assets to a master limited partnership and cut costs to boost shareholder value. It suggested Goncalves as CEO on Feb. 12. On Feb. 13, Cliffs said it was disappointed by Casablanca's move for board seats and that its plan fails to provide sustainable, long-term value.
In response, Cliffs said in a Feb. 12 statement that its board had tried to have a constructive dialogue with the investor and it was disappointed that the firm was "waging a public campaign, rather than continuing its private engagement with our Chairman and management to address our doubts and concerns relating to Casablanca's proposal."
The company took issue with what it said was Casablanca's lack of experience in the mining sector, especially the tax implications of an MLP, and said it was on track to reduce expenses and improve profitability.
Cliffs has long been considered a takeover target, with rumors increasing over the last couple of years.
JPMorgan's Chris Ventresca and Henry Harnischfeger are advising Cliffs. Wachtell, Lipton, Rosen & Katz's David Katz is the company's outside legal counsel. Schulte Roth & Zabel LLP's David Rosewater and Kristen Poole are advising Casablanca.